Core Equity

For the Period Ending: 9/30/2018

Portfolio Managers:
Erik R. Becker, CFA
Gus C. Zinn, CFA

Market Update

The third quarter was an extremely strong quarter for the U.S. equity market with the S&P returning 7.7% for the period. Recent market leadership from the Information Technology sector continued, but the leadership did broaden a bit with the Health Care sector showing particularly strong performance (over 14%) in the quarter. Areas that underperformed were either hurt by rising bond yields or fears of a significant slowdown in emerging markets driven by trade war escalation between the U.S. and China. This combination caused both defensive areas of the market (Real Estate and Utilities sectors) as well as economically sensitive areas (Energy and Materials sectors) to significantly lag market averages. Companies more exposed to domestic growth did best in the quarter.

Portfolio Review

The Ivy core equity strategy underperformed during the quarter as stock selection within Information Technology and Consumer Discretionary was the primary detractor. Despite some cyclical weakness in the semiconductor area, the Information Technology sector in aggregate continues to perform well as the push across industries to serve customers in a digitally connected world remains strong. The sustainability of Health Care outperformance will likely be affected by the political environment with midterm elections approaching. Outside of politics, the outlook for Health Care remains positive as the companies are less economically sensitive and valuations remain reasonable.

As it relates to portfolio positioning, we continue to work towards a more balanced strategy by shifting some of our growth exposure (primarily Information Technology) into more stable areas of the market that are reasonably valued. Despite being later in the economic cycle, we may see opportunity in cyclical stocks if they show signs of a dramatic downturn in earnings power. Our current economic outlook is that growth will decelerate in 2019, but no recession. For the time being, “balance” across value and growth, as well as stability and cyclicality is where we are working to position the portfolio.


Looking forward, the market environment is at a tricky juncture. The valuation gap between growth and value looks extreme. The market has continued to reward companies with strong growth outlooks thinking that their revenues can continue to grow even in a more difficult economic climate. Companies more sensitive to the economy have seen their stocks suffer as the market continues to worry that the economic good news is nearing an end. Trade war rhetoric with China has exacerbated the cyclical fears in the market as global growth would likely decline if tariffs continue to escalate. Companies are beginning to sound the alarm that all the trade war rhetoric and tariff implementation is causing some pause in decision-making that is affecting business activity. At the other end of the spectrum, rising interest rates in the U.S. speak to the strength of the domestic economy. The 10-year U.S. Treasury increased 20 basis points to 3.2% during the quarter to, breaking a multi-decade downtrend. If this rise in rates continues, it would likely be a headwind to growth stocks with high valuations. Understanding where the greatest stock risk lies, however, is a more difficult question than in recent years. We believe the sustainability of domestic and global economic growth will be most important factor in answering the growth versus value debate.

On the positive front, the domestic equity market remains supported by a very strong U.S. economy. Employment is robust with unemployment rate under 4%, wages are increasing at a controlled 2.5-3% rate and corporate earnings in aggregate are growing over 20%. We remain optimistic on the U.S. outlook.

How the trade war rhetoric with China is either resolved or continues to escalate is probably most important in determining whether a more significant change in market leadership is ahead. Predicting government politics is not a game we feel very confident playing, which is why we currently don’t have the portfolio tilted towards one side of the debate. Regardless of how things unfold, our focus remains finding companies which we think have long-term future earnings power above market expectations.

The opinions expressed are those of the portfolio manager(s) and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018 and are subject to change due to market conditions or other factors. Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted.
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Investment Team

Erik R. Becker, CFA

Senior Vice President, Portfolio Manager

Mr. Becker is portfolio manager of the firm’s Core Equity investment strategy and has served in this role since 2006. He has been affiliated with the strategy since 2003 when he assumed assistant portfolio manager responsibilities. He joined the organization in 1999 as an equity investment analyst, covering industries in the consumer discretionary and industrials sectors.

Mr. Becker earned a MS in Finance and a BBA in Finance from the University of Wisconsin-Madison.

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